PENN: We Are Removing Penn National Gaming From Investing Ideas

Takeaway:Please note we are removing Penn National Gaming from Investing Ideas

After a very strong run since we added it to Investing Ideas on May 26th, we are removing Penn National Gaming (PENN) from Investing Ideas today. Shares are up approximately +9% since we added it, versus -3.8% for the S&P 500.

We are still constructive on PENN's long term prospects. The stock has performed well and the valuation now looks reasonable rather than cheap. Most of the catalysts have come to fruition, near term earnings look in line with estimates, and we await a better entry point or the emergence of additional catalysts to revisit the long idea.

FMHQ (Friday Morning Housing Quant)

Takeaway:The builder complex has started 4Q solidly in the green with most of the names performing in-line with what beta would predict.

Our FMHQ (Friday Morning Housing Quant) tables present the state of the publicly traded homebuilders in a visually-friendly, quantitative format that takes about 60 seconds to consume.

Quick Quant Takeaways:

Housing Macro | Election Cycle: We profiled the stark and recurrent pattern of housing performance alongside the election cycle last month (see: Election Cycle Analysis --> Will Housing Trump the Market?). The behavioral underpinning is relatively straightforward – housing is the largest, mostly broadly held asset in the country and populist pandering does not include policy platforms anchored on crushing the primary or singular source of net wealth for a significant percentage of households. According to the NHBR (Here) early evidence out of New Hampshire suggests housing again sits as a central topic of constituency concern. According to the UNH Survey, “ 90 percent of Granite Staters say housing affordability is a problem in New Hampshire, and three-quarters say presidential candidates should focus on it … only 13 percent say the candidates should put “no focus” on it.” The drumbeat of housing-as-an-issue newsflow is likely to only get more steady from here. Moreover, recent chatter has HUD Secretary Julian Castro (HERE) being mentioned as a potential VP candidate for Clinton.

Performance Roundup:Housing stock returns are off to a solid start thus far in 4Q15. The absolute returns for ITB and XHB are +4.3% and +4.1% 4QTD vs the S&P 500 +5.4%. Meanwhile, the average builder QTD return is +5.5%, but this is positively skewed almost +200 bps by HOV, which is +23.7% QTD. Our preferred four horsemen among the builders are KBH, BZH, LEN & NVR (+5.1%, +5.7%, +3.4%, +2.3%).

Valuation:The cheapest names in the group currently are BZH (8.9x), TMHC (9.5x) and MTH (9.6x), while the most expensive are NVR (14.6x), LEN (13.2x), and TOL (13.2x).

Joshua Steiner, CFA

Christian B. Drake

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10/16/15 12:11 PM EDT

LNKD: Tracker Update (Talent Solutions)

KEY POINTS

TRACKER SUGGESTS IMPROVING SELLING ENVIRONMENT: Our LNKD JOLTS tracker is accelerating through the first two months of 3Q15, suggesting an improving selling environment. Our tracker has produced a relatively tight correlation with LNKD's Talent Solutions ARPA dating back to 1Q11 (~0.75). As a reminder, our LNKD Talent Solutions TAM analysis suggest the bulk of that TAM is in the upsell opportunity (ARPA) vs. new account volume. See 2nd note below for detail.

GUIDANCE = WORST-CASE SCENARIO: We suspect LNKD all but removed Display Advertising revenue from its guidance (see 1st note below), so that headwind is more than baked into estimates. That said, we see Talent Solutions as the swing factor moving forward. LNKD should handily beat rebased 2H15 consensus TS revenue estimates barring a considerable deceleration in both ARPA and LCS account growth (see scenario analysis below). LNKD's salesforce ramp into the improving selling environment would suggest the opposite.

See the notes below for supporting detail/analysis on our LNKD Long thesis, and let us know if you would like to disucss. As a reminder, we our hosting our quarterly Internet BEST IDEAS Update call next Tuesday.

PENN: REMOVING FROM BEST IDEAS

While we are still constructive on PENN's long term prospects, we are removing the long stock idea from the Hedgeye Best Ideas list. The stock has performed well and the valuation now looks reasonable rather than cheap. Most of the catalysts have come to fruition, near term earnings look in line with estimates, and we await a better entry point or the emergence of additional catalysts to revisit the long idea.

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10/16/15 11:50 AM EDT

PEP | EXPANDING INTO SNACKS AND BREAKFAST?

This week there have been rumors that PepsiCo (PEP) is looking at taking a minority stake in Chobani. Despite the notion that PEP might be better broken up, the current business model seems to be working as good as any in the consumer staples space.

The Chobani rumor might be an indication about what the company is thinking going forward and what its next move might be to add another growth platform. We believe that PEP could benefit from more exposure to snacking and or breakfast. To that end, PEP could accomplish its push into snacking and breakfast by acquiring General Mills (GIS).

We know, it’s dilutive in the near-term, but acquiring GIS is a long-term play. Besides, Chobani is no longer as meaningful in the Greek yogurt market as it was 3-5 years ago when they were the trendsetter. The bigger competition, such as Dannon and Yoplait have improved their products and caught up with Chobani. It makes more sense for PEP to dive a little deeper into snacking and acquire GIS, who has a strong global yogurt franchise in Yoplait.

Chobani is not going to be cheap; with comps like Annie’s out there, this deal will most likely be dilutive albeit to a much smaller degree. This deal would be so small for PEP that the dilution would probably be undetectable. Chobani has slightly over $1bn in sales making them a top three player in the Greek yogurt market. This is a highly contested market with major manufacturers like General Mills and Danone plowing millions into marketing and promotion at the shelf. Given this level of competition this isn’t a category for the faint of heart, you want a global team that has the knowledge to navigate changing consumer trends. With GIS, PEP would be buying into a global powerhouse that has decades of experience within yogurt and across the food category.

The rumors about PEP (and KO, although they have denied it) wanting to get into yogurt are also a bullish sign for our long call on GIS. General Mills’ yogurt business is one the company’s strongest and best performing brands. Yogurt is not just for the breakfast occasion it truly is becoming a snack for all day-parts.

In addition, GIS has an undervalued cereal franchise that stands at the top of the market. Although the majority believes it to be struggling, cereal has merely reached a point of maturity. The innovation and marketing that GIS and other industry leaders have executed over the last 6-12 months are just now starting to pay dividends. We believe the companies will continue to see positive trends in the category as calendar year 2016 plays out.

PEP would also be buying into a stellar and growing natural and organic franchise. Representing roughly $600mm in sales, General Mills’ natural and organic brands consist of; Annie’s, Food Should Taste Good, Lärabar, Cascadian Farm, Liberté, Immaculate Baking, Mountain High and Muir Glen. These are strong brands within their respective categories and GIS is always looking at other acquisition to grow this portfolio.

Both GIS and PEP have strong brands that have transcended time.

In fact bringing the two companies together would create a very powerful company in the Consumer Staples space.

While it’s unlikely that PEP will buy GIS the opportunity is intriguing:

PEP could accelerate GIS brand growth internationally

Easy to marry each respective foodservice teams and dominate the industry in both front-of-house and back-of-house. Foodservice is a $700bn industry projected to grow at a 4.2% CAGR over next 4 years

General Mills’ products would be a great healthier addition to Pepsi vending machines (Lärabar, Nature Valley, Bugles, Gardetto’s, Food Should Taste Good etc.)

Combination would make it even easier to work with retailers and distributors, would be a one stop shop for many items across the store creating efficiencies for all

Focus on healthy mornings: Items purchased and consumed together, paring items for deals in store (ex: buy a box of cheerios, get $1 off Tropicana)

A lot of the same culture and goals, brand building, innovation, productivity, execution and investment in their brands. Seems like PepsiCo’s management has the fire in them to guide GIS’s portfolio in the right direction

Buying the “Better-for-you” company

A brand for every occasion

Please call or e-mail with any questions.

Howard Penney

Managing Director

Shayne Laidlaw

Analyst

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10/16/15 11:34 AM EDT

An Update On That Barbarous Relic Gold | $GLD

We didn’t add Gold (GLD) to the long side of our Macro Best Ideas until we could see what Gold loves more than anything else (Down Dollar, Down Rates – at the same time) in play.

The question now? How fast can the U.S. data slow before ECB President Mario Draghi has to do EuroQE? That will be an up-Dollar #Deflation event. Stay tuned.

Back on August 28th, we advised Hedgeye subscribers to buy GLD in Investing Ideas. As you can see in the chart below, the recent run-up has been a profitable one for our subscribers. (Our view was based on slower U.S. economic data and our view that the Fed would keep rates #LowerForLonger.)

Since then, GLD is up 5.1% versus the S&P up just 1.9%. Right now, as an immediate-term trade, Gold looks overbought. It’s time to book some gains.

Risk Managed Long Term Investing for Pros

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